Firms in developing countries are increasingly striving to
export their products. However poor quality, high prices brought
about by high production costs, and unreliable deliveries have
eroded competitiveness. These firms seek to improve their
competitiveness in a number of ways, which include searching for
new technologies and internal reorganization. The outcome has,
despite these efforts, not been very encouraging.

This study examines the technological responses of firms in
Tanzania in the face of declining competitiveness. The analysis
uses information from a survey of nine firms: four from the
metals and engineering sector and five from the textile industry.
It was found that technological adaptations and improved
capabilities (both technological and human) are necessary but not
sufficient conditions for improved export competitiveness.
Factors such as a 'hostile' macroeconomic environment, a weak
industrial base and the lack of resources, especially foreign
resources, impose serious limits.

Trends and performance of export manufacturing 1966-90

Three phases of export history

The trend and general performance of Tanzanian manufactured
exports are summarized in Table 8.1 (p. 205). Three main
development phases can be identified over the period 1966-90. The
first phase, 1966 80 was a period of gradual but continuous
growth in manufacturing exports. This growth was consistent with
the growth in overall manufacturing output, which grew from 4 per
cent of GDP at independence (1961) to a peak of 12 per cent in
1977. The major manufactured exports at the time included
textiles, cigarettes, canned food, cement, non-ferrous metals and
batteries. The main markets for these products were in East
Africa, and these markets were lost when the East African
Community broke up in 1977.

The second phase, 1981-85, was a period of significant decline
in manufactured exports. Apart from the loss of traditional
markets, there were pressures on foreign exchange, necessitated
by a decline in the volume of exports, drastic cuts in net
foreign resource inflows and a steep decline in the net barter
terms of trade. The resulting low import capacity combined with
an overall decline in output to reduce significantly the supply
of raw materials and intermediate inputs to industry. This led to
extremely low levels of capacity utilization, which averaged
10-20 per cent. As a result of this deindustrialization' process,
manufacturing activity fell to 7 per cent of GDP in 1985.
Manufacturing's share of national exports also shows a decline
from an annual average of 15.6 per cent during 1975 80 to 13.1
per cent during 1981-85. The degree of export orientation
(measured as the percentage of manufacturing output which was
exported), which had begun to decline steeply during the late
1970s, remained very low at 4.6 per cent. The overall growth rate
measured in 1966 purchasing power parity dollars (PPP$) was -16.6
per cent during the 1981-85 period.

During the third phase, 1986-90 manufactured exports recovered
and benefited from the Economic Recovery Programme (ERP) and the
healthy state of the economy whose real annual GDP growth
averaged about 4 per cent for the period. Even higher annual
growth, averaging about 7 per cent, took place in the
manufacturing sector. This was a reversal of the trend between
1981 and 1985, when manufacturings value added declined by 4.2
per cent per annum. In real terms the growth of manufactured
exports averaged 14.1 per cent per annum for the period 1986-90
and the portion of output which was exported increased to a
historical high of nearly 18 per cent.

The resurgence in export growth during the recent period can
be attributed to several factors. They include a package of
export incentives (e.g. adjustment in the exchange rate, a
foreign exchange retention scheme, the seed capital revolving
scheme, the presidential export award, export drawback scheme and
export credit guarantee scheme); the 'own funds' scheme which has
resulted in repatriation of capital; a fall in the real price of
petroleum and related products; temporary improvement in the
terms of trade due to the coffee boom in 1986; and increased
donor aid as a result of adopting economic reforms (Bagachwa et.
al., 1990; World Bank, 1991).

While Table 8.1 shows a significant increase in export
orientation, especially after the mid-1980s, Table 8.2 (p. 206)
reveals the further broadening of the export base during the same
period. The increasing diversification of exports is clearly
reflected in the doubling of the shares of the non-traditional
exports2 in total exports between 1986 and 1990. If
gold is included as a non-traditional export, this share reaches
about 50 per cent in 1992 (Ndulu and Semboja, 1992).

The changing policy context: towards export orientation

Until the mid-1980s, development policies and the system of
production and export incentives in Tanzania (e.g. an over-valued
currency, import controls, administrative allocation of foreign
exchange and high protective tariffs) tended to discriminate
against exports and to benefit import substituting crops and
products. Tanzania has therefore relied on growth in domestic
demand and import substitution as the basis for industrial
development. As late as 1986 an estimated 60 per cent of
Tanzania's total supply of manufactured products were produced
and consumed locally, 5 per cent were exported and 35 per cent
imported. This contrasts with figures at independence (1961),
when 30 per cent was domestic production, 8 per cent was exported
and 62 per cent was imports (Wangwe and Bagachwa, 1990).

However, the policy of import substitution was reversed with
the adoption of the ERP in 1986. Under the ERP the policy
emphasis on the supply side of the economy has shifted from an
import substitution strategy (ISS) to an export orientation
strategy (EOS) and in particular towards export diversification.
The new policy advocates the shifting of resources from
non-tradables to tradables by changing the structure of
incentives, i.e through devaluation and exchange rate
unification, changes in domestic prices and the relaxation of
wage control policies. Measures which allow private importers to
use their own funds to import goods and exporters to retain a
portion of foreign exchange for importing goods have also
contributed to the reversal.

The emphasis on export orientation is known to have a number
of advantages, some of which have been demonstrated empirically.
Some analysts contend that policies which do not discriminate
against exports allow the realization of economies of scale'
permit the exploitation of comparative advantage, foster greater
capacity utilization, facilitate employment creation via market
expansion and are a major source of enhanced industrial skills,
productivity increases and technological improvement (Krueger,
1978; Rati, 1985; Bhaghwati, 1987).

In other quarters however, preoccupation with the EOS has been
criticized for (1) failing to recognize the untenability of the
static equilibrium and the pervasive market failures arising from
dynamic and unpredictable learning, externalities or
complementarities, (2) lacking strong empirical evidence to
justify the link between export performance and productivity
increases and (3) failing to recognize other key factors that
influence efficiency and productivity, especially the role of
capabilities in terms of skills and technological endowments
(Helleiner, 1986; Weiss, 1988; Lall, 1992).

The strict separability between ISS and EOS has also been
strongly questioned. As the experience of South Korea has shown,
EOS can be preceded by, and can even build upon, the achievements
of ISS (Jaeobsson and Alam, 1992). Moreover, the Chilean
experience has demonstrated the insufficiency of market forces
alone in effecting shifts from ISS to EOS (Weiss, 1988; Cooper,
1992). Furthermore, some countries pursuing ISS have managed to
develop more dynamic industrial sectors than others, and in feet
some of the highly export-orientated NICs have built up a major
part of their competitive strength by protecting selected
industries (Lall, 1992). This study is based on the premise that
ISS and EOS are not necessarily competing alternatives but can
actually converge and reinforce each other.

The issue of the diversification of Tanzania's export base is
quite crucial. In 1991 the six traditional crops accounted for 55
per cent of the total merchandise export earnings. Prices for
these primary products have generally been very unstable. The
terms-of-trade index for Tanzania deteriorated from 100 in 1980
to 73 in 1989. The purchasing power of exports index also
declined from 100 in 1980 to 68 in 1989 (UNCTAD, 1990). Worse
still, the raw material content in modern products is declining
and there are gluts in some commodities (such as coffee) which
are produced in Tanzania. At the same time, sisal fibre continues
to face stiff competition from polyethylene, while coffee may
soon face competition from manufactured biocoffee. These trends
spell disaster for Tanzania, especially when its three largest
export crops (coffee, tea and sisal) are reported to have low
income and price elasticities (Islam and Subramanian, 1989).
Moreover, to the extent that the promotion of most traditional
exports is associated with relatively limited technological
dynamism, the feasibility of some of the SAP policies which are
designed mainly to facilitate the expansion of traditional
primary commodities is highly questionable. In the circumstances,
if the restructuring process is to bring about sustainable
development it should emphasize the diversification of
traditional primary exports into the technologically more dynamic
non-traditional crops and manufactured exports.

A framework for analysing export competitiveness

A firm as a unit of analysis

A typical African industrial firm is described as one that
lacks international competitiveness, dynamism and strong linkages
(Lall, 1992). These weaknesses cannot simply be blamed on the
lack of imported inputs and domestic recession, nor on the lack
of incentives due to distorting trade and industrial policies as
the current ERP supposes. These are only a part of the problem. A
major structural weakness for African industrial firms has been
their failure to build up an indigenous technological capacity
which is capable of acquiring technological capabilities (Lall,
1992; Wangwe, 1992). Technological capabilities (TCs) are defined
in this context as a set of skills and information needed to
operate a given technology and its associated organizational
system efficiently (Lall, et al., 1991, p. 2).

The main objective of this study is to examine the process of
building and maintaining competitiveness in export markets.
Recent research on the acquisition of technological capabilities
in developing countries (Katz, 1987' in Latin America; Lall,
1987, in India; Pack and Westphal, 1986, in Korea; Lall, 1992 and
Wangwe, 1992, in Africa) and the earlier work on the evolutionary
theories of growth by Nelson and Winter (1982) have underscored
the point that any meaningful analysis of the determinants of
industrial performance should initially focus at the firm level.
The extrapolation of firm-level factors should then be used to
develop broader explanations of industrial performance at the
sectoral or national levels. The unit of analysis in this study
is the exporting firm. The focus will be on how different firms
strive to build up technological capabilities.

The nature of capabilities

Lall et al., (1991) have conveniently summarized and
classified the various capabilities and their functions in the
form of an illustrative matrix akin to Table 8.3 (p. 212). The
columns explain the major technological capabilities by function.
The rows indicate the degree of complexity or difficulty. The
major categories of capabilities are investment, production and
linkages. The acquisition of technological capabilities therefore
involves a number of things such as making some adaptations to
suit local conditions, i.e. gaining mastery, making minor
improvements and creating new technologies or innovating through
R&D. In the case of small firms some of these functions may
be performed by the entrepreneur. But as the firm expands it may
develop dynamism by deepening its capabilities, and most of the
functions become formalized as separate units are set up to deal
with each.

The firms in the sample

Nine firms were selected: four from a heterogenous set of
industries and five from the textile industry. Detailed firm
histories are presented in the next section. One of the firms,
Northern Electrical Manufacturers Ltd (NEM), is an indigenous
privately owned firm, located in Arusha town in northern
Tanzania. It has been selected because it started in 1979 as a
small firm with state support, producing electrical products for
the domestic market with just 12 employees. It gradually acquired
modest technological capabilities and grew into a moderately
successful exporting firm with 120 employees by 1991. Themi Farm
Implements Ltd (Them), another firm in our sample, presents a
contrast to NEM. It also started, in 1981, as a small firm with
state support, employing 10 persons, and is located in the same
town of Arusha. It has, however, failed to acquire substantial
technological capabilities and has remained a small firm, with 15
employees in 1991. Its export performance has been unimpressive.

A third firm in our sample is Afrocooling Systems Ltd. based
in Dar es Salaam. The firm started as a small unit with 45
employees and with solid investment capabilities. It gradually
deepened its technological capabilities and grew to become a
medium-sized exporting firm with modest success. Matsushita
Electric (EA) Company, a subsidiary of Matsushita Electric
Industries of Japan, is a foreign-owned and relatively old firm
established in 1967. The firm is fairly large and currently
employs 500 workers. It assembles Japanese components to make dry
cell batteries, radios, torches and fans. It has depended mainly
on training to develop very limited local capabilities. The firm
exports batteries to Rwanda, Burundi, Zaire and Malawi. It is
exploring the possibility of manufacturing radios.

Notes:
* Exports in PPP$ at 1966 prices computed as Exports (in
Tshs)/PPPNOER, where PPPNOER is the nominal official exchange
rate that would maintain purchasing power parity with the major
trading partners with 1966 as a base.
PPPNOER = NOER/RER*100.
**Measured in current US$.

The firms from the textile industry were chosen to reflect two
main strata: exporters and non-exporters. One firm, Tanganyika
Textile Industries Ltd. a private company, started as an exporter
but failed in that field. It is currently concentrating on the
domestic market only. Another private firm, JV Textiles, started
as an export firm and has maintained export business throughout.
Three publicly owned firms, Friendship, Morogoro Canvas Mill and
Morogoro Polyester Textiles, were established to supply the
domestic market. Due to an interplay of factors these firms have
entered the export business and have successfully maintained a
hold.

THE DYNAMICS OF FIRMS' CAPABILITIES

This section focuses on the dynamics that shape capabilities
at the firm level. These dynamics relate to three interrelated
aspects: (1) the processes through which firms have evolved over
time and the historical conditions which have shaped their
particular development paths (i.e. firm histories), (2) firms'
strategies and capabilities and (3) the implications of global
technological developments for firms' flexible and adaptive
capabilities.

Table 8.2 Export diversification in Tanzania, 1966-92

Share of
non-traditional exports in total exports

Share of
manufactured exports exports in total

(a)

(b)

(c)

(d)

1966-70

0.2486

0.3594

0.0754

0.1346

1971-75

0.2350

0.3221

0.0871

0.1452

1976-80

0.2562

0.3258

0.1122

0.1567

1981

0.2961

0.3885

0.0923

0.1103

1982

0.3092

0.3938

0.0846

0.1124

1983

0.2402

0.3550

0.1148

0.1528

1984

0.2240

0.3098

0.9852

0.1437

1985

0.2404

0.3158

0.1144

0.1622

1986

0.2101

0.2475

0.1125

0.1258

1987

0.3572

0.4205

0.1814

0.1017

1988

0.3545

0.3972

0.1938

0.2266

1989

0.4081

0.4395

0.2407

0.2806

1990

0.4209

0.4883

0.2254

0.2673

1991

0.3260

0.4470

0.1920

0.2120

1992

0.3000

0.4260

0.1540

0.1800

Sources: Bank of Tanzania Economic and Operation
Report, various issues;

University of Dar es Salaam. (Economic Research Bureau) 1992:
URT, Economic Surveys various issues: URT, Foreign
Trade Statistics, various issues: URT, Annual Trade
Reports. Figures up to 1990 were cited from Ndulu and
Semboja, (1992); those for 1991-92 were obtained from the Bank of
Tanzania (see Table 8.6).